About time to do another estimate of the Market Risk Premium of the ASX.
Using the ASX200 index as my proxy for the market, I have downloaded daily prices of the index from yahoo finance. Dates used are from 1 Jan 2009 to yesterday (approx 2.5 years worth of data)
Using this data, I calculated the logarithmic returns for each day and found the average return (which turns out to be 0.02% (go team!). However, this is the average daily return and so we want to annualise it (by multiplying it by the number of trading days per year (which is 256). This gives us an average annual return of 5.6%.
However, this does not take into account dividends (which I did not include in my previous post...doh!). Using the RBA figures for dividend yield since 2009, we have an average dividend yield of 4.38%.
Thus total market return = 9.98% (not too bad).
We then need to calculate the risk free rate. Using the RBA website again to download the average 10 year Bond rate since 2009, we have a risk free rate of 4.85%
So the market risk premium of the ASX = 9.98 - 4.85 = 5.13%
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